Real Estate Principles: Appraisal Basics

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Value

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Is the relationship between the thing desired and a potential purchaser

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The four essential elements of value are

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1) Demand

2) utility

3) Scarcity

4) transferability

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Demand

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The desire, need, and ability to purchase

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Utility

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Usefulness; ability to install a desire for possession

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Scarcity

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In short supply, Usually more expensive

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Transferability

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Can change ownership, as with a deed

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Define the appraisal process

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The act of defining the problem is made up of four major steps

1) what

2) When

3) why

4) how

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1) what

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Identification of real estate

Identification of real property

interest Identification of standard of value

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2) When

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Effective date of appraisal

Date of appraisal report

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3) Why or purpose

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Intended use

Intended users

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4) How

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Scope of the appraisal work

Assumptions

Limiting conditions

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Highest and best use

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This analysis is carried out to determine what use provides the highest return on the investment

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The three approaches to value

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1) cost approach

cost of new construction

2) Market approach

utilizes recent confirmed sales of similar properties

3) Income approach

is based on the return of income to investor

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Data

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General data (region, City, Neighborhood)

Specific data (Site analysis, Location, Lot and improvements)

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Lots

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There are six major types of lots

1) Cul-de-sac lot

2) Corner lot

3) Key lot

4) T-intersection lot

5) Interior lot

6) Flag lot

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Depth table

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is a percentage table that illustrates how highest value is located in the front part of a lot in an urban commercial area

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Frontage footage

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is typically the width of the property along the street

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Plottage

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two or more contiguous properties joined to make one property, becoming more valuable than the sum of the properties separately

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note

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In earthquake-prone areas it is advisable to have a soil report prepared when purchasing vacant land

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Amenities

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are those improvements or views that increase the desirability or enjoyment rather than the necessities of the residents.

view of the ocean, mountains, or city lights at night increases the value of the home.

Amenity improvements would include Jacuzzis, swimming pools, tennis courts etc.

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Improvements

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are any buildings, walkways, pools, and other structures.

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Capital Improvements

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are permanent improvements made to increase the useful life of the property or increase the properties value.

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Off-site improvements

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are improvements made to areas adjoining the parcel that add to parcels usefulness and sometime its value

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On-site improvements

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are structures erected permanently for use on a site, such as buildings and fences

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notes

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the three steps or phases in construction of a home are:

Land acquisition, development, and construction

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Warranty plan

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is an insurance plan that provides financial protection against defects in any major home construction

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Basic appraisal principles

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1) supply and demand

2) change

3) conformity

4) contribution

5) substitution

6) progression

7) regression

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principle of, Supply and demand

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states that as the supply of land decreases, the value of land increases, because more people are competing for the desirable land

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principle of, change

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is that real property is constantly changing, value is influenced by changes in such things as:

population size, shopping centers, schools and colleges, freeways, economic and social trends.

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real property life cycle

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1) development (values increase)

2) Maturity (values stable)

3) Decline (values decrease)

4) revitalization (life cycle begins again)

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Principle of conformity

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states that the maximum value is obtained when a reasonable degree of building similarity is maintained in the neighborhood.

the principle of conformity is one of the primary reasons for zoning regulations. they protect the neighborhood from nonconforming uses and from infiltration of incompatible structures

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principle of contribution

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states that the value of a particular component

is measured of its contribution to the value of the whole property.

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principle of substitution

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a buyer will not pay more for a particular property if it cost less to buy a similar property of equal utility and desirability

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principle of regression

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is when a house of greater value is adversely affected by houses of comparably lesser value

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principle of progression

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is when the value of a lesser residence is increased in value by its location in a neighborhood of better homes